Let’s say you really like a city and want to invest in it, but you see lots of new construction. They’re building apartments, retail, maybe even office buildings. That’s a sign of a healthy market, but it’s also a caution about competition.
New apartments have to lease up quickly. They offer screaming deals to new tenants, and those tenants are typically already living in that area. They moved out of other apartments. Up and out. If you own apartments in that area, you have to fight to keep your tenants. Remind them of the community, how much you appreciate them, and then a financial incentive to renew.
Although competition keeps you from being greedy and entitled, it is still brutal.
So the dilemma is, do I invest where there is lots of new economic activity like construction, or do I invest where there’s not much new construction.
Here’s another factor. The timeline. New construction is one of the easiest indicators to track. Permits, breaking ground, projected completion, it’s all public knowledge. Brokers, Costar, and everyone else in the industry watches it closely.
Why does your favorite market have so much new construction? Because rents shot up and people are moving there. And another very important factor.
Interest rates were lower. Contractors took advantage of the lower rates, took out the loans, and got busy.
But that wasn’t this year, maybe not even last year. What you see today started in 2022 and 2023. In 2024 rates are through the roof. That project would need to be killer good to have gotten started this year.
What does that mean to you? It means that those apartments that are being built today will be coming on line this year and into next year. They’ll drag the market down. Rents will stay flat or decline where there’s lots of new housing coming to the market.
Then the flood of new housing will slow to a trickle, and that trickle should last for a few years.
If you were looking for a window of opportunity to buy apartments, this is it. Not when new apartment deliveries have already slowed, but when they are coming on line, dragging rents and valuations down with them.
Market update
Baton Rouge, LA – The city of Baton Rouge is a sleeper city with some of the most compelling growth opportunities in the U.S. Long an oil and gas hub that rivals its Texas neighbor, it has more recently been nurturing a world class medical research community. One that will also rival its Texas neighbor, Texas Medical Center.
Baton Rouge does not benefit from being in a state that’s favorable toward new business. CNBC ranked Louisiana 47th in the country for favorable business climate. The Workforce component of that score was actually a rank of 50. Out of 50. Mainly because the state doesn’t have a concentration of STEM works or college degrees.
Baton Rouge is fighting an uphill battle but is seeing success. It might be the magnet that attracts the educated talent needed to realize the vision of city leaders for a medical research and healthcare destination that becomes the envy of much larger cities.
It helps that it is home to four colleges. They serve to keep smart people around town but also contribute to a highly desired college-town culture. Who doesn’t want to live in a college town. This includes LSU, where rumor has it they play sports. How does a small town like Baton Rouge take basketball, football, gymnastics, and I’m sure other teams to national NCAA championships? They’re doing something right.
Healthcare is not the only reason to be looking at Baton Rouge. Look at the map. The Mississippi River has direct navigable access to the Gulf and points north. The oil and gas industries have taken advantage of this and have made Baton Rouge the home of the fifth largest refinery in the U.S.
Baton Rouge’s population has remained stable at 221,000 people over the last 30 years. Do you need a growing population to be able to invest in it? It helps, but just as important is learning where the pockets of prosperity are around a city. When you see key factors of an emerging market developing in a city, it is critical to get in early. Baton Rouge has started demonstrating these qualities but they aren’t showing up in the data yet.
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Finer Points of Multifamily Properties
How NOT to do Accounting for Real Estate
Do you view accounting as a necessary evil? We need to report our income to the IRS and get our big tax break. Just get the numbers together, fill in the forms, and then file it away until next year.
Right?
If you have owned real estate, you have to keep good books. You contact your CPA at the beginning of the year and deliver your P&L and balance sheet. But if that’s all you do, you’re missing big opportunities to streamline your business.
First is the data that accounting provides, all year long. Do you track metrics? I’m obsessed with metrics because the right metrics tell you what’s going to go right or wrong. Income, expenses, lease-ups, renovations, you can see trends. Industry rules of thumb? How far off are your metrics from the rest of the industry. That’s what accounting does.
Second is the time and effort it takes your CPA to sift through your data. Did you throw it together at the start of the year? Or has it been maintained properly all through the year?
I have owned multifamily real estate for over 13 years but didn’t start out with a good process. I have no excuse because I had been an IT consultant for that time period and managed performance tracking for large corporate teams. Knowing how to do it did not mean I was as thorough for my own business.
I learned, though.
I have turned over incomplete books, I have had to retrace accounting history back to prior years, and I have had to file amended returns for prior years. I have done the accounting myself in spreadsheets and Quickbooks, hired bookkeepers, and still have had issues.
I’ve actually never filed taxes myself. I have hired CPAs every year I’ve owned properties. But still had these problems.
Here is what I have learned to do.
1. Find a CPA you can trust who has specific experience with income producing real estate, specific to what you do. A CPA who is expert in development may not be as expert in value-add.
2. Find a bookkeeper who knows Quickbooks.
Get them on board before you close your deal. Be sure the bookkeeper knows what the CPA expects to see in Quickbooks. It is not just income and expenses. It is capital accounts for your investors, it is bank account balances including security deposits. Possibly other data from the settlement statement. Has to be right on day 1.
3. Get familiar with your investor portal. It tracks amounts invested and by whom, and distributions. This all feeds into your accounting systems.
4. Two months after you close, have your bookkeeper enter the closing data from the settlement statement and initial capital accounts.
5. Establish a data flow from your investor portal to Quickbooks, even if it’s manual.
6. Document processes. Bookkeepers and even CPAs come and go but the process has to stay the same.
7. Have your bookkeeper get the P&L and bank balances updated soon after the end of each month. Don’t put this off, get it updated.
8. Get your CPA to review Quickbooks after the first three months of operation and tell you what has to change.
9. Have your CPA review Quickbooks in November to confirm the year’s data is complete. If not, get it fixed.
10. Push your property manager to finish end of year accounting on time, ideally by mid-January.
11. Have the CPA start doing your taxes and K1’s by end of January. You really should have K1’s to investors by end of February and your property’s federal return by mid-March.
12. Have your CPA file for an extension. Every time. Regardless of whether you need it. There’s a fine for being late and not filing for an extension, and it’s easy to forget.
Want to know what else? All of that great advice was just to get your taxes done. But don’t ignore the benefit of having the data available to you when you need it. Thinking of selling, refinancing, bringing on new investors, cost segregation? What’s the tax impact. Your CPA can only help you with that if your books are current.
For me, I am completely capable of doing most of this, but like so many other roles in real estate ownership, I don’t enjoy this part so I don’t do a great job at it. I have others do it.
It is truly inspiring seeing someone do a task you don’t like, and do it with enthusiasm and enjoyment. I like having them on my team.
“Adventure is worthwhile”
– Aesop